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Coast Insurance Bill Sails Through House

ANNAPOLIS – A bill approved unanimously by the Maryland House of Delegates last week does not entirely guarantee major homeowner insurance carriers do not pull out of coastal areas around the state including Ocean City and much of Worcester County, but it does provide safeguards for property owners should they decide to in the future.

The Maryland House of Delegates last week approved House Bill 1353, titled the Omnibus Coastal Property Insurance Reform Act, which, among other things, will force major insurance carriers such as Allstate and State Farm, for example, to gain prior approval from state insurance regulators before they abruptly decide not renew existing policies or issue new policies in at-risk coastal areas.

The bill was borne out of a decision by Allstate and other major carriers such as State Farm and Nationwide in early 2007 to refuse to accept new homeowner policies in coastal areas around the state. The big insurance companies cited the potential risk of increased losses in the future due to dire forecasts of increased coastal storm activity and anticipated sea level rise as the reason for their decision to pull out of coastal areas all over the eastern seaboard including Worcester and Ocean City.

Still smarting from huge financial losses incurred during major coastal storms such as Hurricanes Katrina and Rita, Allstate and other big insurance carriers raised premiums or stopped writing new policies altogether in several southern coastal states a few years ago and extended the policy northward to include coastal Maryland last year. A review by the Maryland Insurance Commission revealed the insurance companies were well within their legal right to refuse to issue new policies in coastal areas, but a task force was formed to explore ways to prevent the pull-out in the future.

The bill passed by the House last week includes several components that alter the requirements an insurer must meet before refusing to issue new policies or renew existing policies solely because the insured property is located in a coastal area of the state. Introduced by Delegate James Mathias (D-38B), who represents Ocean City and Worcester County, the bill attempts to ensure there is affordable and available property insurance in coastal areas of Maryland.

Chief among the components of the bill is a requirement that would prohibit insurance carriers from greatly increasing deductibles on policies in coastal areas without prior approval from the state’s insurance commission. Under current law, the insurance providers are allowed to set their deductibles at any level without approval from the commission, but the bill passed by the House last week would force the companies to seek approval when they attempt to raise deductibles by five-percent or more.

“Anything that exceeds 5 percent is called prior approval,” said Mathias this week. “They would need to file for prior approval and substantiate the reasons for the increase. It basically gives the homeowner some assurances their deductibles won’t go through the roof abruptly. It builds some accountability into it.”

Similarly, the bill has safeguards in it to ensure the major carriers don’t pick and choose where they want to write new policies in Maryland. The bill would require prior approval from the state insurance commissioner if a company decides not to renew existing policies or issue new policies in certain coastal areas.

“If they decide to cancel or not renew 5 percent or more of their business, they have to have prior approval and they have to show cause for the decision,” said Mathias. “This holds the major insurers closer to the concept of supplying insurance to all of Maryland. If they’re going to abandon more than 5 percent of their business in the state, they need approval and they have to show why.”

It’s important to note there was and should always be insurance policies available for properties in coastal areas regardless of what the big insurance companies decide to do. However, the so-called surplus lines of insurance do not afford the same guarantees of protection as the standard lines offered by the major carriers.

The bigger companies offering standard lines of insurance pay an assessment that provides a pool of money available during a catastrophe if one or more of the larger carriers go insolvent. Basically, if Allstate went insolvent during a major catastrophe, other carriers such as Nationwide and State Farm, for example, would step in and meet the demand using money paid through assessments. Many of the providers of so-called surplus lines of insurance do not offer the same guarantees, according to Mathias.

Another major component of the bill passed by the House last week would require insurance providers to offer discounts on premiums if the property owners takes proven risk reduction steps such as installing hurricane shutters, secondary water barriers, reinforced roof coverings and other disaster mitigation efforts.

Mathias said the bill achieves what was intended while remaining palatable for the major insurance carriers.

“We knew what we wanted to achieve with this, but we didn’t want to make it so overzealous that we lost more insurance companies than we gained protection for homeowners,” he said. “We think this bill is amenable to the insurance companies. If they’re not writing policies, they’re not making money.”